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Wednesday, Oct 13, 2004

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Karnataka industries `reeling under tax burden'

Our Bureau

Capital expenditure can go up as much as 8 per cent for those planning to either set up an industry here or expand its operations, the study says.

Bangalore , Oct. 12

SEVERAL industries in Karnataka are on the verge of shutting shop because of the heavy burden of State taxes including the newly introduced special entry tax.

According to a study carried out by an independent agency, local industries face the prospect of closure if the State does not immediately ease the tax burden. Because of the huge tax burden, capital expenditure can go up as much as 8 per cent for those planning to either set up an industry here or expand its operations.

It said that even though the State had withdrawn 4 per cent sales tax on suppliers of machinery, tools, transformers and other such goods, it had levied a fresh 12 per cent sales tax. For those importing such equipment, the tax burden on the suppliers was 4 per cent Central Sales Tax and an additional levy of special entry tax. These levies had driven up the cost of the manufactured goods.

"The perception of being an `industry unfriendly' State is gaining credibility because of heavy taxes and poor infrastructure," the study says. It lists out industries such as software and manufacturing, the two major sectors in Karnataka, which could become extremely unviable.

The study says that the special entry tax (SET) has become a bane for most industries in the Karnataka, especially those in the manufacturing and software sectors. One of the auditing firms, JCSS Consulting, which handles cases relating to SET, cited the case of manufacturing companies, which have been granted exemption from taxes on their purchases based on quantum of investments.

JCSS Consulting's Director, Mr Jatin Christopher, said the levy of SET would increase the cost of purchase, whether they are directly imported or routed through vendors in Karnataka.

He said when SET-paid goods are sold in Karnataka, the Karnataka Sales Tax (KST) payable is reduced by the amount of SET already paid. Section 4(1) of the Karnataka Special Tax on entry of Certain Goods Act, 2004 extends this facility when "... a dealer in notified goods becomes liable to pay KST by virtue of sale of such notified goods... '' Now, if these goods are used in a manufacturing process, the law does not permit such adjustment as the manufacturer does not sell the SET-paid goods `as is'. Manufacturers are treated as `dealers' for purposes of entry tax in view of a 1993 decision of the Karnataka High Court, Mr Christopher pointed out.

Even in the case of infotech companies, if they have been exempted from payment of KST on purchase of IT-equipment, they will also be liable to SET. They can get a relief, only if the State Government allows for a special exemption under the SET Act.

On the other hand, if they purchase from vendors within Karnataka, the vendors who would have paid SET will not be entitled to get any set-off due to the operative words being `becomes liable to pay KST' and hence this increase in cost for the vendors will result in increase in sales prices, Mr Christopher said.

Citing an example, the study says that the tax on industrial inputs is 4 per cent. But an additional cess of 15 per cent on industrial inputs increases the total tax burden to 4.6 per cent. In neighbouring States the tax ranged between 2 per cent and 3 per cent. With industries operating at profit margins as low as 2 per cent to 7 per cent, additional taxes have made it difficult for industries to carry out their operations.

The study says that though the State encouraged industries to set up their own power generating units, the Government withdrew tax concession of 4 per cent on diesel and increased the tax on diesel used for generating power to 20 per cent from 17.5 per cent. Hence the effective tax increase was 20 per cent.

In States like Andhra Pradesh, the tax is as low as 4 per cent while Tamil Nadu and Maharashtra do not charge any taxes. It said that not only is the per unit cost of power the most expensive compared with other States, but also there is no stability in supplies and the quality of power is poor.

The study points out that if the State wants to make its industries competitive, then immediate steps need to be taken. For example, concessional tax on diesel used in captive power consumption on machinery, tools and transformers should be reinstated. It should also maintain 4 per cent tax on industrial inputs both pre-VAT and post-VAT and exempt all industrial inputs from special entry tax.

More Stories on : Economy | Karnataka

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